DBRS Morningstar Confirms Ratings on Enbridge Gas Inc. at “A” and R-1 (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Unsecured Notes rating of Enbridge Gas Inc. (EGI or the Company) at “A” and EGI’s Commercial Paper rating at R-1 (low). All trends are Stable. The rating confirmations reflect (1) EGI’s stable business risk profile as it is in the second year of the five-year price-cap incentive regulations (IR) lasting through 2023 and there are no expectations of any material changes during this five-year period; (2) its relatively solid credit metrics and DBRS Morningstar’s expectation that the credit metrics will improve modestly over the medium term as a result of rate base growth and synergy realization; and (3) solid liquidity and low refinancing risk in the next few years.

The impact of the Coronavirus Disease (COVID-19) pandemic on EGI’s operations and financial performance has been modest. Although the pandemic is ongoing, DBRS Morningstar does not expect it to have a material impact on EGI over the near to medium term because EGI operates critical infrastructure and continues to provide an essential service.

The Company’s ratings are supported by a stable regulatory framework in Ontario and a very large and economically strong customer base of approximately 3.8 million customers across the province—the largest in Canada and one of the largest in North America. This large customer base is one of the key factors allowing EGI to achieve operating efficiency under the price-cap IR. Good synergy was realized from the amalgamation of Enbridge Gas Distribution Inc. (EGD) with Union Gas Limited in 2019 and the first half of 2020, and significant synergy is expected to be achieved through 2023. EGI is allowed to keep 100% of the earnings up to 150 basis points in excess of the allowed return on equity (8.52% in 2020, and reset annually). EGI’s reliability and the flexibility of its natural gas supply have improved significantly, compared with EGD, as a result of the addition of Union Gas’s storage facilities. The ratings incorporate EGI’s exposure to volume risk and the potential regulatory lag in the recovery of natural gas costs when the price of natural gas increases substantially.

EGI’s credit metrics have improved since the amalgamation and remained solid in 2019 and the 12 month period ended June 30, 2020. DBRS Morningstar expects EGI’s credit metrics to improve modestly over the medium term, reflecting operating efficiency (including synergy realization) and incremental cash flow from a growing rate base. Although EGI will likely generate substantial free cash flow deficits over the next few years because of its major capital projects, DBRS Morningstar expects EGI to fund its future capital expenditures and to manage its dividend policy in such a way that the capital structure will be maintained in line with the regulatory capital structure of 64% debt and 36% equity.

DBRS Morningstar does not expect any positive rating actions during the deferred rebasing period through 2023. However, a negative rating action could be taken should the following events occur: (1) an adverse regulatory change has a negative impact on EGI’s business risk profile or (2) EGI experiences a significant deterioration of its credit metrics on a sustained basis. DBRS Morningstar considers these scenarios unlikely.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 16, 2019); DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020); and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019) which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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